HUFFINGTON POST
08/04/2011 02:46 pm ET Updated Oct 04, 2011

Kraft's Rosenfeld breaking up food giant she built

By Martinne Geller

NEW YORK (Reuters) - Kraft Foods Inc Chief Executive Irene Rosenfeld plans to break up the food giant, just 18 months after driving through the controversial acquisition of UK chocolate maker Cadbury.

The split will give investors the chance to bet on a snacks business that is growing fast in emerging markets, or opt for the stable dividends offered by a slower growing general grocery business that includes Oscar Mayer lunch meat and Kraft cheese.

The surprise move by the $48 billion company, disclosed on Thursday, is the latest in a broad trend of corporate break-ups that includes Fortune Brands Inc, ConocoPhillips and ITT Corp.

The move also comes just weeks after billionaire investor Nelson Peltz disclosed a 12.2 million share stake in Kraft through his firm Trian Fund Management.

To an extent, the split will undo the empire-building strategy Rosenfeld has employed over the last few years. The CEO, who said she looks forward to playing a leadership role once the transaction is done, said she and the board have been considering a split for several years, and that now is finally a good time.

Both Peltz and Warren Buffett, Kraft's largest shareholder with a nearly 6 percent stake, support the split, CNBC reported. Neither could be reached by Reuters.

Kraft, North America's largest packaged foods company, said it expects a tax-free spin-off of the North American grocery business to be completed by the end of 2012.

Shares of the company, which also reported higher-than-expected second-quarter earnings and raised its full-year outlook, were down 12 cents to $34.18 in afternoon trading on the New York Stock Exchange in a broadly lower market.

Janney Capital Markets analyst Jonathan Feeney estimates the sum of Kraft's parts could be worth $37 per share, based on a trading multiple of 10.5 times estimated 2012 earnings for the 60 percent of company profit generated by the snacks business, and an 8.5 multiple for the other business.

Feeney said the split made "some sense, but (was) not a game changer."

"It seems as though everyone is at the break-up game these days," Bernstein analyst Alexia Howard said in a research note. "We wonder if there is any read across here for companies like Campbell Soup Co or even H.J. Heinz."

Rosenfeld, on a conference call with analysts, declined to comment on potential acquisition opportunities.

GROWTH VERSUS MARGIN

A year and a half after the hostile takeover of Cadbury for about $18.5 billion, Kraft said its snack business and North American grocery business now "differ in their future strategic priorities, growth profiles and operational focus."

The snack business, with annual sales of $32 billion, operates in high-growth emerging markets with products like Oreo and Lu cookies, Cadbury chocolates and Trident gum.

The Lu business, bought from France's Danone in 2007 for $7.6 billion, was another high-profile acquisition by Rosenfeld.

The North American grocery business, with annual sales of $16 billion, is focused in more mature markets but has high profit margins with products like Kraft and Velveeta cheeses, Maxwell House coffee and Capri Sun drinks.

Since the split-up is expected to take a year, Rosenfeld said it was too early to say who would run each business. She also said the move was not due to pressure from Peltz or Buffett.

"I think Nelson and other shareholders have expressed points of view on the subject, but fundamentally this is an idea that we've thought about quite a bit over the last couple of years and it has now been enabled by the actions that we've taken," she said.

CNBC reported that Peltz said he was "very supportive of management and board for coming to this decision."

In addition to the Cadbury, Lu and other deals, Kraft sold its frozen pizza business last year for $3.7 billion and its two dozen Post cereals in 2008 for $1.7 billion.

Since Kraft took control of Cadbury in February 2010, its stock is up nearly 29 percent. By contrast, the Standard & Poor's 500 index is up about 14 percent, while PepsiCo is up more than 5 percent and Nestle is down nearly 4 percent.

Kraft was advised on the split by Centerview Partners, Evercore Partners and Goldman Sachs.

EARNINGS BEAT, RAISES OUTLOOK

Kraft reported second-quarter adjusted earnings of 62 cents per share, topping the average analyst estimate of 58 cents, according to Thomson Reuters I/B/E/S.

Net revenue rose 13.3 percent to $13.9 billion. Organic revenue rose 7.1 percent, with price increases contributing 5.5 percentage points of that rise, and the rest coming from volume and mix of products.

The company said it now expects 2011 operating earnings of at least $2.25 per share and organic revenue growth of at least 5 percent.

Its prior forecast called for earnings of at least $2.20 per share and revenue growth of at least 4 percent.

Kraft said it expects costs to rise by a low-teen percentage rate this year due to higher costs for fuel and commodities. It earlier forecast a high-single-digit increase.

(Additional reporting by Mihir Dalal in Bangalore; Editing by Saumyadeb Chakrabarty, Ted Kerr and John Wallace)